Leidos [LDOS] on Thursday posted strong fourth quarter earnings and sales as its bottom line benefited from a handsome gain on the sale of its former headquarters.
Net income nearly tripled to $127 million, $1.72 earnings per share (EPS), from $44 million (59 cents EPS) a year ago, with the real estate sale adding $82 million while operating margin improved in both of the company’s segments. A year ago the company’s results suffered from a $40 million impairment charge related to the sale of a former renewable energy facility.
Excluding the real estate gain and a small restructuring expense in the quarter, adjusted income from continuing operations was $58 million (78 cents EPS), topping consensus estimates by 12 cents per share.
Sales in the quarter rose 10 percent to $1.3 billion from $1.2 billion a year ago, driven by growth in both of the company’s operating segments.
Revenue in the National Security Solutions segment rose 4 percent to $848 million on the ramp up in work for the United Kingdom Ministry of Defence’s Logistics Commodities Services Transformation contract the company won last year, which was partly offset by reductions in work with war-related funding. Company officials said on an earnings call that they believe contract activities with Overseas Contingency Operations has hit a floor.
At the Health and Engineering segment, revenue climbed 20 percent to $432 million on growth in all key activities including engineering design build, federal health record modernization, and security products.
Operating income at both segments was also higher driven by improved program performance at National Security Solutions, and higher profit margins on security products sales and reduced indirect expenses at Health and Engineering.
Leidos introduced guidance for 2016 with sales forecast to be between $5.1 billion and $5.3 billion and adjusted earnings per share from continuing operations between $2.75 and $2.95 EPS. In 2015 sales were nearly $5.1 billion and the increase this year will be driven by gains in National Security Solutions, James Reagan, Leidos’ chief financial officer, said on the earnings call. Adjusted earnings per share from continuing operations for 2015 were $2.89, and Reagan said the pressure on earnings this year will be from higher taxes as rates normalize.
The outlook excludes the pending $5 billion acquisition of Lockheed Martin’s [LMT] information systems business.
Roger Krone, Leidos’ chairman and CEO, said the outlook for this year and beyond is positive, noting that the “global threat situation continues to increase in complexity and the domestic budgets are reflecting that.” He added that the two-year budget agreement agreed to by Congress and the Obama administration in December “has provided needed stability, predictability, and strong budget funding levels for discretionary funding for contractors for the next two years.”
Krone also said that while the budget is a “good leading indicator for our industry,” sales are better reflected in outlays.
“In the DoD, after four years of decline, the current government fiscal year represents an inflection point for discretionary outlays with a return to growth, which is expected to continue through the government in fiscal 2018,” Krone said. “This turn upward in current dollars is a positive sign, particularly after the significant drops in prior years.”
Krone also said that Leidos is seeing movement across the federal government—including the intelligence community, DoD, and civil—away from lowest price technically acceptable contracting in favor of incentive contracts that enable government procurement officials to drive cost or technical performance.
Orders in the quarter were $706 million and for the year a robust $7.2 billion. Total backlog at the end of the fourth quarter stood at $9.9 billion, a big increase from $7.8 billion a year ago. Funded backlog at the end of the quarter stood at $2.5 billion, down $200 million from a year ago.